Market Orders and How They Work

Market orders are the most commonly used trade type to buy shares of stock. They are used so much that they got named after the stock market itself! When someone says they bought shares at the market, that means they used a market order. But what exactly is a market order, and how does it work?

A market order is most similar to a "buy it now" button on Ebay. When you use the buy it now button, you are buying that item, NOW. Not in ten minutes, not in ten hours or ten days, but now. This is same concept of the market order, which basically says, "get my my shares now at whatever the best price is available at this very moment."

So, if we were to buy stock with a market order, then we would get our shares at or closely near the ASK price at the time of the order. And, if we were to sell stock with a market order, then we would get our shares at or closely near the BID price at the the time of the order. The ASK price is the lowest price someone is willing to sell their shares for at that moment, and the BID is the highest price someone is willing to buy shares for at that moment.

Most people use market orders because they simply want the stock now. The problem with this though is that you might not always get the price displayed by the BID or ASK. If the stock is very lightly traded (is more volatile) than you have to be careful when buying your shares with a market order. As a result, some traders when filling out their trade tickets online will use limit orders to buy and sell shares. But, that is another day's lesson.

Comments

  1. Posted by Warren Buffett on April 25, 2007 at 10:12 pm

    As Jim Cramer says "Always place a limit order"

  2. Posted by Blain on April 25, 2007 at 10:29 pm

    I almost put that in this post, perhaps when I explain how limit orders work tomorrow, haha. :grin:

  3. Posted by DAVE on October 8, 2007 at 12:55 am

    yes, i definately agree with jim cramer, always place alimit order, last time I didnt, I got in a dollar too expensive, then it plummeted straight back down again a day later, never listen to your broker saying, oh it wont make much differnce

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